Category Archives: Investment Strategy

Back To Normal?

Posted April 11, 2018 by paragon. tags:Tags: , , , ,
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Written by Nathan White, Chief Investment Officer

After a tremendous start in January (and what seemed like a continuation of 2017), the markets finally hit some long-anticipated turbulence in February and March.

The stock market had been riding a nice wave. Last quarter, I suggested it was a prudent time to review allocations and risk exposure while the markets were doing well. Now that volatility has returned, let’s review current conditions and factors, as well as future considerations.

The current economic conditions are generally considered to be exemplary of the late stage of an economic cycle. However, cycles can run longer than anticipated, and there is no way to know exactly when they will end. The effects of the fiscal stimulus are helping to extend the economic cycle, but they could also increase the potential for inflation to finally rear its head. A characteristic of a late economic cycle is where the economy continues to do well, but asset price declines or increases only moderately.

A research report from NDR (Ned Davis Research, Economics/Global Comment March 2018) indicates that two-thirds of countries are growing above their long-term growth potential, which last happened in 2000 and 2007 before major recessions. However, the dangerous threshold could still be a year or so out, and the timing can be tricky. Does this mean we are bearish? No. We are just getting cautious. There are still a lot of positives, but it is our job to investigate the risks.

Our risk models are indicating a rise in risk. Our trend and breadth models, while still bullish overall, have deteriorated. We are monitoring these closely. Equity valuations are still broadly high, but earnings are forecasted to grow nearly 20% for the year. We will be watching for changes to these results and expectations. Another characteristic of a late economic cycle is a flattening yield curve. This occurs when short-term rates exceed long-term rates. The curve has been flattening as the Federal Reserve increases interest rates, but for various reasons, long-term yields have not moved commensurately. The following graphic on the next page helps put the current environment in perspective.

Investing is a long-term game, and trying to time exits can be hazardous to returns — especially if future returns are harder to come by (i.e. lower). You will need to keep exposure to get returns. Stay invested — but be flexible in the mix of those investments.

Remember, pullbacks are a normal part of market action and create opportunities. What is not normal is the absence of pullbacks (like we experienced in 2017). The trillions of dollars — pumped into the markets by global central banks since the Financial Crisis — has smoothed out volatility and market corrections. The latter should increase as central banks begin to reverse course. Keeping interest rates so low for so long has encouraged massive borrowing at cheap rates. Corporate borrowing has surged with U.S. companies’ debt reaching their highest levels since 2000. Many companies have been able to borrow at rates and amounts that wouldn’t

have been possible in a “normal” rate environment. As rates rise, the cost of servicing this debt will increase and could expose many weak hands. This is healthy in the long-term, though, as it discourages wasteful or inefficient use of precious resources. The real question is that as credit conditions normalize, what will be the effects on markets and the economy? I believe current market conditions to be exemplary of returning to a more normal environment.

STRATEGY REVIEW

The S&P 500 ended down for the quarter, and only two of 11 S&P 500 sectors posted gains and outperformed — Technology and Consumer Discretionary. Bonds were also down for the quarter as they face an uphill battle of rising interest rates. Within TopFlight, all three of the strategies (Fundamental, Momentum, and Seasonality) were up slightly for the quarter. Some of the best performers within our Momentum strategy were Nvidia, NetApp and Micron Technology. Our small cap momentum stocks generally lagged in the first quarter but closed the gap by quite a bit in March. Within our Fundamental stocks, the best performers were Northrup Grumman, Ruths Hospitality and Eastman Chemical. After a difficult 2017, our Seasonality strategy posted a gain for the quarter as well. We continue to like the valuation position of our current stock holdings. Their collective forward P/E (price/earnings) multiple is about 14.8 versus 17.4 for the S&P 500, which is about 15% less expensive. Many of these holdings are industrial and materials companies that could benefit more from the tax cuts and possible infrastructure spending.

Our Managed Income portfolio ended the quarter slightly down, primarily due to the slide in equities. We continue to maintain about 40% of the portfolio in short-term corporate bonds, which will allow us to capture the rise in interest rates without getting hit with significant capital losses. Another 15% of the portfolio is in intermediate Treasuries. We continue to avoid long-term bonds.

Going forward, our models still indicate a reasonable case for further stock market gains, but probably not on the level of past years. Inflation trends are still positive for now, and the strong economy and earnings growth outweigh the concerns I discussed earlier. But as the risks increase and the economic cycle matures, it is important to have a more flexible approach with your investments to control risks and take advantage of opportunities. This is exactly the way we like to manage investments.

If you have questions about your allocation and risk exposure, please give us a call. We are here and happy to help.

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Not What Anyone Expected

Posted January 20, 2018 by paragon. tags:Tags: , ,
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Written by David Young, President and Founder of Paragon Wealth Management

Two-thousand and seventeen was a banner year for stocks. Not just in the U.S., but around the world. Investors with a long-term perspective were rewarded once again.

It was not a good year for the market forecasters. Their primary talent is consistency — and they were consistently wrong.

At the beginning of last year, most Wall Street Strategists forecasted a gain of 4% or less for the upcoming 2017. The actual gains were five times more than those projections. Following their advice would have been disastrous.

Between U.S. tensions with North Korea, the new presidential administration, and the state of politics in America, the forecast was increased market turmoil. Instead, we saw a calm in the markets we had not seen in decades. The VIX, which is a measure of market volatility, unbelievably closed below a level of “10” more times last year than any other year in its history.

In addition, the forecasts regarding global growth and inflation were off base. If you have been a client for a while, you understand why we never invest based on market forecasts.

Successful investors, on the other hand, focused on the upbeat fundamentals. Corporate profit growth was sparked by economic gains at home and abroad. The political push to decrease regulations and effectively free the “free market,” combined with the recently passed tax plan, increased positive expectations even more.

The U.S. economy grew at 3.3% in the third quarter. That was the second quarter in a row the GDP exceeded 3% — a feat that hasn’t occurred in three years. Even more impressive, fourth quarter estimates by the NY Fed expect GDP to come in at almost 4%, which is higher than anyone previously forecast.

The S&P 500 performance reflected the strength of the economy and was positive every single month in 2017. That has not happened since 1970.

PARAGON PORTFOLIOS 

An interesting surprise with this year’s rally is how many individual investors did not benefit from it. Throughout the last nine-year surge, after the devastating market of 2008, individual investors have continuously pulled money out of funds that own U.S. stocks. Nearly $1 Trillion has been pulled out since the start of 2012, according to EPFR Global, a fund tracking firm.

From a trading perspective, this has been a difficult market. Why? When markets consistently go up they don’t require a lot of trading. They require you to be in the right place and hang on.

Additionally, straight up markets, like the one we experienced last year, create false confidence amongst investors. Many people decide they are investment geniuses. And they are … until they aren’t anymore.

Investing based on luck, without a strategy, is impossible to replicate. Since no one knows in advance when the market is going to go up, go down, or run sideways, relying on luck rather than strategy eventually catches up with investors. Just like the temporarily successful gambler, it is just a matter of time before they implode and suffer significant losses. As the saying goes, no one rings a bell at the top when it is time to sell.

And then there were Bitcoin experts this holiday season. They sought me out at seemingly every event I went to. But they had a puzzled look on their face when I asked them to explain exactly “what” it was that they were investing in, or why their Bitcoin fortune would vanish if they lost their account password.

Another axiom we dodged this year was that traditional wisdom of “sell in May and go away.” If we had done that, we would have missed significant gains between May and November. That was another obstacle that could have cut your returns by more than half. Fortunately. our models kept us invested all year.

Overall, we were pleased with our portfolios. All performed well in the context of the risk level they are invested in.

Managed Income acts as the anchor to the portfolios. As long as interest rates stay pushed to the floor, its returns will be relatively low, but still better than bank rates. On a positive note, it looks as though we may see an increase in rates this year, which should help Managed Income. Regardless, its primary purpose is to provide stability for our portfolios.

Top Flight, with all of the changes we made a year ago, performed well. If you would like more detail on the three portfolios — momentum, fundamental and seasonality — that make up Top Flight, give us a call and we will happily walk you through them.

The new Balanced Portfolio and the two Private Funds both had a strong performance this year as well.

GOING FORWARD 

Our Consumer confidence or individual optimism is the highest it has been in 17 years. Investor sentiment is also the most bullish it has been as far back as we are able to track it.

This puts us in a tricky spot. Historically, we know that as investor sentiment moves higher we are approaching a market correction. The theory is that once everyone who is going to invest is invested, there is no one left to push the market higher.

The difficulty with market sentiment as an indicator is timing — you don’t know exactly when such a correction will occur. As a result, we are also watching internal market technicals but with a more skeptical eye than normal. Trend indicators, Advance/Decline lines, Industry Breadth, etc. all still look good.

Last year we updated Top Flight with our best individual stock models. In an effort to match or exceed the returns of the broad markets, we tied Top Flight’s more directly to those broad markets than we had historically. Our belief is it is better for Top Flight to accept more short-term downside volatility so that its returns over the long term will increase.

With this year’s market strength, along with the changes we made to Top Flight last year, it is important to correctly set the amount of volatility you are willing to accept. We can effectively reduce your overall volatility by decreasing your exposure to Top Flight and increasing your exposure to our more conservative portfolios. Getting that right is one of the pillars of investment success.

If you would like to talk about how you are positioned or make any changes, please give us a call. We are always happy to hear from you. Have a great 2018!

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Calm Seas?

Posted January 10, 2018 by paragon. tags:Tags: ,
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Written by Nathan White, Chief Investment Officer

For the stock market, 2017 was a year of unprecedented smooth sailing. The S&P 500 has risen for 14 months straight, a new record. It also didn’t have a monthly decline, which has never happened before. Volatility was non-existent. The economy continues to move along with no signs of an imminent recession. Moreover, there have been no corrections in sight.

The latest global manufacturing indexes (PMIs) ended with the strongest reading in nearly seven years. Many of our forward-looking economic indicators also point to even faster growth in the coming months. New orders and export orders are at their highest levels since early 2011. The ratio of new orders to inventories matched its strongest level since June 2014. Backlogs are at the highest point since May 2010. On the back of this strong data, job growth looks set to expand further. (Source: NDR – Economics, Global Comment, 1/3/2018) 

Price pressures are strong but have not exploded, which means inflation is still modest. In 2018, we will be watching to see if the tax cuts and possible infrastructure spending will push inflation expectations higher. Interest rates are still low overall, but moving up. The bond market could become a problem in the coming year (more on that later). Other risk factors coming from our models are high equity valuations and extremely optimistic investor sentiment. Most of our models are still positive, so it remains a bull market until proven otherwise.

2017 REVIEW 

The best performing areas of the equity market last year were large-cap stocks, growth stocks and the technology sector. Small-cap and value stocks, while still up for the year, lagged the broader market. It will be interesting to see if value stocks make a comeback in 2018.

Top Flight had good performance being up 18.5% for the year. It was up about 11.9% for the last six months of the year, which was about a half percent better than the S&P 500 after fees. As you know, in 2017 we started taking individual stock holdings that comprise about 60-64% of the Top Flight portfolio. We have been pleased with the result. Our stock holdings overall averaged nearly 21.5% for the year. The stock portfolio is broken down into two segments. The first is a fundamental-based approach that focuses on stocks with the least downside risk. These stocks performed well and were up about 25.5% for the year. Considering these stocks have somewhat of a value/quality aspect, this was an impressive showing. The second segment of our stock holdings is a momentum or trend-based approach. This segment was up just shy of 18% for the year. Within this segment, the small-cap names did the best, particularly in the last half of the year. Overall, the best performing individual names were Home Depot, United Health Group, Domtar, Owens Corning, and Northrop Grumman.

Looking ahead for 2018, we like the valuation position of our equity holdings. The forward PE (price/earnings) multiple of our stock holdings is about 16.8 versus 19.8 for the S&P 500. This means our current holdings are about 15% cheaper based upon projected earnings for next year. Not a bad place to be after the significant upward move in equities.

Top Flight also includes two other strategies based on ETFs. One strategy is a seasonality approach that rotates among various sectors and industries. This strategy comprises 20-25% of Top Flight and was up about 11% for 2017. While up for the year, seasonality was our weakest performing strategy last year. However, in the prior three years it was our best performing ETF strategy. Our approach with Top Flight is to diversify by strategy. No strategy will outperform every year, and due to its solid long-term record, we still have confidence with the seasonality method. The second ETF strategy we employ is a single ETF momentum-based strategy. This strategy, which comprises 10% of Top Flight’s allocation, performed well on the year and was up over 25%. Most of this performance came from the PowerShares QQQ, which is heavily weighted in large-cap technology.

On the conservative side, our Managed Income portfolio had a net return of about three percent. Still not ideal, but we are constrained by the environment of low yields. We achieved similar returns to our benchmark, but with a lot less risk to rising interest rates. To get a higher return, we would have had to load up on risky debt, which would have only produced an additional 1-2% return. Not worth it in our estimation. We still do not recommend long-term bonds. The bond market is getting backed into a corner. As interest rates rose last year, it was short-term rates that moved up while the yields on longer maturity bonds didn’t move (or went down slightly). The difference in yield between the two and 10-year Treasury bonds is now only about a half percent. The Federal Reserve is set to raise interest rates another 0.75% to 1% next year. If longer maturity bond yields do not start going up, it won’t take long for short-term bond yields to exceed them. This is called an inverted yield curve and is often a harbinger of recession. If longer maturity bond yields do move up with the Federal Reserve actions, then 10-year Treasury could lose at least 5%, and longer maturities 15% or more. Because of these dynamics in the bond market, we are not as exposed to interest rate risk as most bond portfolios. We don’t hold any maturities longer than 10 years and the Treasuries we do hold are a hedge against any possible stock market correction. Keeping most of our fixed income exposure to shorter-term maturities allows us to increase our yields as interest rates rise without getting hit with significant capital losses.

MAKE HAY WHILE THE SUN SHINES 

The roaring stock market offers investors an opportunity to review their asset allocation. Now is the time to rebalance — not when the inexorable correction comes. Most have the tendency to put money into whatever has been doing well. To keep the proper risk exposure, investors should trim their exposure to stocks as stocks increase. One of my favorite axioms is to take what the markets give you, but unfortunately, investors have short memories. The increase in the stock market has simultaneously increased allocation to stocks. When the correction occurs, those who have not re-allocated will take a bigger hit to their portfolios than they can actually stomach. Please contact us if you would like to re-view your allocation.

We appreciate your trust and business and wish you a prosperous and happy 2018!

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Stocking Up

Posted October 22, 2017 by paragon. tags:Tags: , ,
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Written by Nathan White, Chief Investment Officer

How long will this upward move in stocks last? It’s a constant and valid concern, especially considering how well the markets have done for years. What will end the rally?

We are currently dealing with elevated valuation and sentiment levels, historically low volatility, rising interest rates, reversal of quantitative easing, terrorism, natural disasters, political uncertainty, and more. It is impossible to know what concern will finally “stick” and be the material cause for a correction. Sometimes markets just simply get exhausted to the upside. However, as there are always market concerns, being on the right side of the trend is more important. The current trend and economic indicators remain supportive of further stock outperformance. The market quite literally climbs a continual wall of worry. We will keep monitoring our models for indications of risk, but for now the weight of the evidence remains bullish.

If I had to pick my primary concern, it would be the potential effects from the Fed’s reversal of quantitative easing. The Fed’s quantitative easing actions (i.e. bond asset purchases) have provided tremendous liquidity to the markets. How long the markets will be able to move higher in the face of this withdrawal remains to be seen. There is usually a lag time for Fed actions to be felt in the economy and markets. As the Fed is starting slow, it may be some time before what is now being dubbed quantitative tightening (QT) has a material effect. We will watch the process with great interest.

On the constructive side, economic data continues to be positive globally. According to our indicators, recession is still not in the cards anytime soon. U.S. economic growth grew at 3.1% in the second quarter, which was slightly higher than expected. Manufacturing activity is the highest in 13 years and service-sector activity is the highest in 12 years. While stocks are expensive right now, they are not at extremes. Corporate profit growth remains positive and is offsetting the slow pace of rising interest rates. While interest rates are rising they are still extremely low on a historical scale. The prospect of fiscal policy being passed is still supporting the markets due to the potential economic shot in the arm it could provide.

Another positive is that we are heading into what is seasonally the best time of year for stocks. Additionally, the majority of global markets are trading above their moving averages, suggesting that momentum continues to support further gains.

Before this quarter, one of our concerns was that the breadth of the market advance was not very wide — only a few sectors and stocks were making up the bulk of the advance. However, last quarter alleviated some of these worries as the first half laggards such as small caps, energy, and value stocks rallied nicely. The final weeks of the quarter saw a rotation back into many of the “Trump trade” stocks.

Last quarter was good for the stocks in our Top Flight portfolio, which was up 6.3% for the quarter compared to 4.5% for the S&P 500 Index. Our stock portfolio is broken down into two segments and is currently comprised of 30 holdings of 2% each (60% total). The first is a fundamental based approach that focuses on stocks with the least downside risk. These stocks gained about 6.4% on average for the quarter. The second segment is a momentum or trend-based approach. The small cap segment of this approach was up about 11.2% and the large/mid-cap segment was up about 9.8% for the quarter. The best performers came from the auto parts industry with BorgWarner and Lear both up around 20% and 18% respectively for the quarter. Other good performers were building material companies such as Owens-Corning and Continental Building. Vertex Pharmaceuticals performed nicely after positive data on its cystic fibrosis drug. We also saw continued good performance from our aerospace and defense holdings of L3 Technologies, Northrop Grumman, Lockheed Martin, and Booz Allen Hamilton. Many of the small and mid-cap names did particularly well in September, accounting for much of the gain for the quarter.

Top Flight also includes two ETF based strategies. One strategy is based on a seasonality approach that rotates among various sectors and industries. It is comprised of three to five positions of 5% each. This strategy has been an underperformer this year and is only up about 2%. It was dragged down in the first half of the year by energy and retail exposure. While seasonality has been disappointing this year, it has been a good performer in prior years, sometimes attributable for the bulk of the gains in Top Flight. We still have confidence in this approach. The other ETF strategy is a single ETF momentum-based strategy, which is about 10 percent of the portfolio. This segment has had a single holding all year so far, the PowerShares QQQ, which is heavily weighted in technology. It is up about 22.5% for the year.

We are still grinding along in the Managed Income portfolio. Due to the low yields and the risk of extremely high prices, we are still keeping our powder dry. We are getting similar returns as the benchmark (for a lot less risk) and we are not locked into today’s low rates. Most broad-based bond funds or conservative portfolios are comprised of various mixes of longer-dated bonds. As interest rates rise, the losses on those bonds will offset the meager yields offered. Most fixed income funds or portfolios are sitting on a pile of future potential losses. There is no avoiding the dilemma, and even if interest rates didn’t rise they would be stuck with their current low yields. Therefore, we have minimized our exposure to longer-dated bonds. We believe our portfolio to be more conservatively positioned. We still prefer shorter maturity bonds, and as interest rates have risen their yields have improved. Short maturity bonds allow us to increase our yields as interest rates rise without getting hit with capital losses. While we know it is hard to accept low returns, it is better than reaching for yield and taking bigger risks like so many investors are doing. Don’t succumb to the desperation many are giving in to! Yield chasing can be hazardous to your financial health. It’s better to get a lower, more stable return than to put too much at risk.

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Quiet Summer

Posted July 18, 2017 by paragon. tags:Tags: , ,
Chair on beach_opt 2

Written by Dave Young, President and Founder of Paragon Wealth Management

In terms of market volatility, it’s been a quiet year so far — mild back-and-forth movement with a general upward bias. Unusually quiet.

Stocks outperformed bonds in the second quarter. The NASDAQ Composite was the leader for U.S. markets. Emerging Markets had a strong showing. International markets surprisingly outperformed the U.S. The weakest trades were commodities, gold and the U.S dollar.

The market has appeared stable because of the primary indexes like the Dow and S&P 500. Also, large cap stocks have been fairly consistent through the first half of the year.

However, under the surface, it has been difficult to latch on to any consistency. There has been a random movement between growth and value, small caps and mid-caps, sectors and industries.

In the sectors and industries, the trends have been the most divergent. The Trump trade stalled as congress stopped implementing his agenda, while the FANG trade from 2015 (Facebook, Apple, Netflix, Google) reemerged. Also, the drop in oil prices and the flattening of the yield curve contributed to the dispersion.

All in all, mostly positive so far.

2017 PREDICTIONS… 

It is always interesting to compare what the “experts” predict versus what actually happens. At the beginning of 2017, Wall Street strategists projected the S&P 500 to end the year up about 5.5%, according to Birinyl Associates.

For the first six months, the index is up 8.2%. No one predicted that only five tech companies — Facebook, Apple, Amazon, Microsoft and Google — would account for about one third of the indexes gain.

In contrast with predictions, The VIX, which measures market volatility and is known as the “fear index,” plummeted to its lowest level in 20 years.

The Fed told us they were going to keep raising interest rates this year — and they have. That factor, combined with the Trump Administration’s pro-growth policies, led investors to plan for the Ten Year Treasury interest rate to move up. Instead, surprisingly, the yield dropped from 2.446% to 2.298% over the past six months.

The U.S. Dollar was supposed to strengthen in 2017. Instead, it has dropped 5.6% since the beginning of the year.

Oil prices were predicted to stabilize after major producers agreed to limit output in late 2016. Instead, U.S. oil prices fell into a bear market in the middle of June and are down 14% year-to-date.

It seems stock prognosticators and fortune tellers still have a lot in common. This is why we ignore forecasts and base our decisions on models that interpret what is actually happening in real time.

WHERE FROM HERE? 

The last time we saw a 5% correction was after the surprise Brexit vote. You probably missed that correction if you weren’t watching the market daily — it came and reversed in a matter of days.

The Brexit correction was 250 market days ago, which set another record of the longest period of time (in the past 20 years) we have gone without a 5% correction.

This low volatility is not normal. Following the first quarter’s low volatility, we only saw two days in the past quarter where the market moved up more than 1% (April 24th) or down more than 1% (May 17th).

In my opinion, we are in a difficult spot. On the one hand, the market is not cheap. But if the S&P 500 is not reasonably priced, then why does everyone keep adding money to it?

There are three pillars holding the market up.

First, the lack of other alternatives has kept the money coming into stocks. Investment options are banks and money markets, which pay nothing. Treasury notes and bonds also pay nothing, and they have significant downside if interest rates go higher. There are annuities, which shouldn’t even be classified as investments, in my opinion. Or there’s real estate, which you have to search long and hard to find anything of value. There just aren’t many decent options.

Second, the economy is fundamentally sound. Historically speaking, stock corrections aren’t usually bad when the economy is on solid footing. If we start to see signs of a recession on the horizon, the risk to the market increases significantly.

Third, the Trump hope. The market took off when Trump got elected. That didn’t make any sense if you read the papers or listened to the nightly news. However, it did make sense to investors. When the market rallied, investors believed Trump was going to reduce taxes, reduce regulations, fix healthcare and move our economy back toward its free market roots.

Then congress got involved and the Trump hope waned. That is where we are now. However, there is still some of that hope intact. Many investors no longer believe his changes are a slam-dunk, but they do think the changes still “might” happen. The fact it is still a possibility is the third pillar holding up the market.

These three pillars are what’s making an expensive market get more expensive. This is why every time the market acts like it is getting ready to sell off … it doesn’t. So far, everyone who has been sitting on the sidelines lamenting they are missing this run, jumps in when the market starts to go down.

How long will this last? It has already lasted longer than normal. It can keep going until it dies of exhaustion or one of the three pillars is taken out.

IN THE MEAN TIME 

Rule one: Don’t worry. It doesn’t change anything. It makes you feel bad. It is completely pointless.

Rule two: Stick with the basics. Invest according to your risk tolerance. Make sure how you’re invested is aligned with how much money you’re willing to put at risk. Even though it seems like a great idea to get more aggressive when markets are good (like they are now), don’t take the bait. Stay the course. This is a long-term project. Stay invested in a way that makes sense through good and bad market environments. Feel free to reach out to us — we are always happy to re-evaluate your investment strategy and risk tolerance.

Finally, if you haven’t had a chance to look at our new Private Income Fund, give us a call. It is a good option to consider in this market environment.

Have a great summer!

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Mid-Year Review And Outlook

Posted July 12, 2017 by paragon. tags:Tags: , , , ,
Screen Shot 2018-03-22 at 4_opt

Written by Nathan White, Chief Investment Officer

Volatility in the equity and bond markets has been at historic lows. The economy has been strong enough to support stocks, but not too strong to disturb bonds. While still on the expensive side, equity markets are being sustained by growing earnings. They are also still anticipating an increase in economic growth based on upcoming fiscal and policy measures. If the intended reforms keep getting delayed, it could result in a return of volatility in the second half of the year.

Global growth has been improving, and so far looks to be around 3.4% for the year compared with 2.3% for the U.S. As growth in places like Europe has improved, the ECB is setting up to follow the Fed’s footsteps in tapering its extremely accommodative monetary stance. Central banks are becoming more hawkish and could be worried about financial stability. That means they need to keep/start tightening to stay ahead of any issues and build up their ammunition. But for now, asset prices keep improving in this low inflation environment.

Recently there have been indications that the leaders of the first half of the year seem to be overdone. Whether it is simply profit taking or an outright rotation remains to be seen. We could see a churning process throughout the summer as the market tries to digest the first half gains and anticipate the environment and factors that will affect the second half of the year. For now, 75% of industries are still in uptrends. The majority of our models are bullish, but we have seen deterioration in some areas. We would like to see a broader advance across all segments rather than just the narrow leadership that has occurred. Our sentiment models are flashing caution, as they are in the overly optimistic zone. Earnings growth must continue in order to support current high valuations in the face of rising bonds yields.

Growth names doing well in a low economic growth enviroment? 

On the face of it, you would think growth stocks would do better in a high-growth environment, as opposed to the current moderate economic growth conditions. Well, markets aren’t always logical. As the stocks that benefitted from the Trump rally stalled along with his reform agenda, growth stocks took over and became first half leaders. Sectors such as Technology and Healthcare have been the best performers. In an environment of moderate growth, investors placed a premium on names that are currently growing. Much of the focus was concentrated in large mega-cap names such as Facebook, Apple, Amazon, Microsoft, and Google. These five names accounted for about one third of the S&P 500’s year-to-date gain. They are basically defensive names in a low-growth environment. Our exposure to these names has accounted for most of TopFlight’s gains as well.

Our seasonality model, which has performed well the last few years, was a laggard in the first half of the year. The energy sector tends to dominate this model in the first half of a year, but energy stocks have been poor performers due to the drop in oil prices. Seasonality signals are not high conviction through summer months. Small-cap stocks have also been trailing large-cap stocks, as they are more economically sensitive. We have observed this in our small cap momentum stocks as well.

Outlook for the second half of the year 

If a rotation out of the first half leaders develops, we could see a move from growth into value. This would better benefit the energy and financials relative to the technology and large cap growth names. We have had a slant toward value and small-cap in the first half of the year. These stocks will potentially benefit from a shift of growth to value in the second half of the year. We will keep exposure to the high-flying names for now, but want to keep exposure to the value names that have lagged, as they could benefit from a rotation in the second half of the year. If the Trump agenda gets close to becoming reality again, then our small-cap and value exposure could take off.

With oil breaking down, it creates an opportunity in the energy names. Sentiment on the sector is extremely low, and large financial traders drive oil prices in the short run. In the end, low prices are the cure for low prices in commodities. We don’t know where the bottom will be, but are watching this sector for potential plays in the stronger names.

Managed Income 

Interest rates are slowly heading higher. The Fed has raised rates twice this year and is indicating one more increase later in the year and additional ones next year. The Fed also announced it will start to reduce its massive holdings later this year. This will put pressure on bond prices — warranting caution with one’s bond exposure. We still do not recommend buying long maturity bonds, especially as yields have fallen. The extremely low yields are still not worth the risk of owning at these elevated prices. However, we are still in a waiting game until we can lock in higher yields. We have a significant amount of capital to deploy, and we want to wait for a more favorable environment. As yields have come down on longer maturity bonds, they have moved higher for short-term bonds due to the Fed raising rates. A flatter yield curve calls for shifting into cash rather than bonds. We favor short-term corporate bonds where the yields have moved up but the prices have not. We only want to use Treasury bonds as protection as opposed to an outright investment.

We are watching some oversold names in the REIT and telecom space. For example, in the heavily damaged retail space, Tanger Factory Outlet Center (SKT) is looking attractive. With its modern stores and attractive locations, it has been drawing customers away from traditional malls. Its retail tenants comprise unique desired brands along with a discount aspect enabling Tanger to boast a 95% occupancy level. The stock also has a 5.2% yield.

Disclaimer: 1. Investment performance reflects time-weighted, size-weighted geometric composite returns of actual client accounts. 2. Investment returns are net of all management fees and transaction costs, and reflect the reinvestment of all dividends and distributions.  3. The S&P Index is a market-value weighted index comprised of 500 stocks selected for market size, liquidity, and industry group representation The Barclays Aggregate Bond Index is a benchmark index made up of the Barclays Government/Corporate Bond Index.  4. Benchmarks are used for comparative purposes only. The Paragon Top Flight Portfolio is not designed to track the S&P Index and will have results different from the benchmark. The Paragon Managed Income Portfolio is not designed to track the Barclays Bond Aggregate Index. 5. Past performance is no guarantee of future results. Investments in securities involve the risk of loss. Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Put The Odds In Your Favor

Posted November 4, 2015 by paragon. tags:Tags: , ,
Stock Market Graph

Written by Nate White, Chief Investment Officer of Paragon Wealth Management

This article is from Paragon’s Third Quarter Newsletter. If you are interested in receiving a free printed copy of Paragon’s Quarterly Newsletter, please click here.

Investing encompasses two of the most powerful human emotions — fear and greed. In light of the recent market volatility, your biggest fear, without a doubt, is losing money. No one likes to see account values go down. So how much should you worry about losing money with your investments? And how valid is that fear when viewed through a historical lens?

We all know investing is a long-term process. I would take that one step further and propose that the main risk is not being invested. And history proves it.

Fear of the downside prevents people from investing correctly. When markets become volatile or economic fear increases, the apprehension is over values dropping in the present moment. Often the fear is that the values will drop and never come back. No one ever wants to see their accounts drop by 20 or 50 percent — and then never recover. But when in the history of the markets have they ever not come back? Never. Even still, it is amazing to hear this irrational concern over and over and over again.

When markets drop, many people sell out or change to a more conservative allocation, thereby effectively locking in their losses. When someone sells out as the market is going down, they rarely get back in at a lower price. If you sell out when the market is down 5 or 10 percent, when do you intend to get back in? When the market is down 15 to 20 percent? Usually the fears that cause someone to sell do not subside before the market rebounds (and it often become worse). By the time the waters have calmed and the investor’s confidence has returned, the market has moved higher than the point from which they sold.

In fact, if someone doesn’t recover from a market downturn, it is usually because their allocation was overly risky going into the downturn or they changed to a conservative allocation during the slide. It’s not because the markets didn’t recover. For example, if you were overloaded on tech stocks or financials before their respective crashes in the previous decade, you probably had a hard time recovering. People tend to load up on the “hot” things during boom times only to get sorely disappointed when those assets come back down to earth.

Now back to my claim that the real risk is in not being invested. Long-term risks are always harder to confront rationally because they are not immediate concerns. In order to help overcome the fear of the market’s downside, please consider the accompanying table. It displays the historical probabilities of a profit in various timeframes for stocks (S&P 500), 10-year Treasury bonds and a mix of 20% stocks and 80% bonds from 1928 through 2014. The stock market’s chances of being up in a single year have been over 70% — and it only gets better the longer you hold. There has never been a 20-year (and nearly a 15-year) period where stocks have been down. Most people entering retirement today have more than 20 years of “investable” time. Now, I’m not recommending a 100% stocks portfolio for retirees, but the principle remains strong.

For those who are more risk averse or require a more stable portfolio, look at the figures in the 20/80 mix of stocks and bonds. It is better than even a portfolio of pure Treasury bonds in that it has had a better average annual return (6.3% vs. 5.0%) for the same amount of downside risk. This portfolio had only two negative three-year periods out of 85 occurrences and has never had a negative five-year period. Talk about putting the odds in your favor!

Not one of us has control over the market, but we do have control over letting time work in our favor. This table shows that negative periods are in such an impressive minority that they should be looked upon as opportunities — or at least ignored from an investing standpoint. Not many people wanted to invest during the 2008-2009 financial crisis — and I get it. The headlines were scary and it seemed as though the economy might collapse. But in hindsight, it was a great buying opportunity very few took advantage of.

There will always be things to worry about — and today is no exception. Consider that the period covered in the above review included the worst World War ever, a Great Depression and 12 recessions, the Cold War, numerous other wars and conflicts, oil shocks, inflation shocks, strong and weak dollar periods, debt bubbles, fiscal crises, various housing booms and busts, technology booms and busts, and both Republicans and Democrats. Despite all these hazards, the markets have moved up, reflecting the virtues of a free market and providing an effective method for investors to build their wealth. Don’t be left out!

Disclaimer Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

 

Flexibility First

Posted August 4, 2015 by paragon. tags:Tags: , , , ,
NYSE building with flag_opt

Written by Nathan White, Chief Investment Officer

As the year has progressed, we’ve voiced concerns about both the bond and stock markets — and the need to stay flexible. We have moved our portfolios into a more defensive stance to protect against the current risks and to take advantage of any increases in volatility. While we are not outright bearish, we are seeing signs for caution.

Our investment strategy is a dual-model approach that uses various models to determine what assets to invest in and what our overall exposure to those assets should be. We analyze investments in a risk/reward framework that seeks to diversify by strategy in addition to traditional asset class diversification. Our focus on risk management is a crucial element in creating the robust portfolios our clients want.

The inputs we use on the models, which determine our overall exposure to the markets, cover a variety of factors. These include economic, valuation, monetary, market internals and sentiment factors.

ECONOMIC FACTORS 

The economic factors we use cover a wide range of measures that assess the current and future strength of the economy. They include measures such as the Leading Economic Indicators (LEI), which is comprised of 10 components designed to signal peaks and troughs in the business cycle. The U.S. LEI increased sharply in May after a somewhat weaker first quarter, indicating that the economy is returning back to a moderate growth trajectory for the second half of the year. The employment picture looks good as the economy has been enjoying full employment and climbing wages. Other key economic indicators have been weaker than expected, again confirming a rebound back to the range of 2.5 percent GDP growth. However, the continued pace of moderate economic growth should keep inflation below 2 percent. Overall, economic growth is mildly bullish as it is neither too strong nor too weak.

VALUATION FACTORS 

The valuation factors we follow are signaling caution. While valuation is not a favored timing method from our point of view, we do like to use it in context to help gauge risk. High valuations can be risky, as they indicate good news (which is then reflected in prices). Any disappointment can lead to painful readjustment, similar to what occurred after the tech boom in the late ‘90s. However, stocks can stay overvalued and undervalued for long periods of time, making valuations a difficult timing measure for stocks. The S&P 500 is currently trading with a price/earnings (P/E) multiple of about 19 times trailing earnings. Historically, this is on the high side, but not extremely so as the average is around 16 to 17. Low interest rates are also a boost to higher valuation levels as they support lower costs of capital for companies.

Going forward, with interest rates at rock-bottom levels, it can be difficult to support high valuation levels without an increase in economic growth and corporate profits. Since 1981, the median P/E for stocks has been 19.3 and the current reading is 24.9 (source: NDR as of 5/31/2015). This means that valuations are higher across the board today, relative to a narrower index such as the S&P 500. Profit margins are also at the high end, as companies have been become efficient at lowering costs to boost profits over the past six years. To grow from this point, companies will have to add capacity, which increases costs.

In fact, some of the most overvalued areas of the market are in areas usually thought of as the safest — the highest dividend yielders. High valuations are often associated with fast-growing companies like high-flying tech companies. While that’s probably true in the case of social media and biotech companies, it is interesting that what is generally a more conservative area is now an expensive one. The median forward P/E of the S&P 500 dividend high yielders is 17.33, compared to an average of about 12 since 1983. The cause for overvaluation in this area is the Federal Reserve’s unprecedented zero-interest-rate policy. With interest rates so low, investors have been driving up the prices of dividend yielding stocks. We have been very cautious of the risk of bonds and bond-like proxies such as these. With rates so low — and now set to rise — these areas have ironically become some of the riskiest areas for investors. Since the financial crisis, we have seen many investors in the search for safety and income buying stocks based upon the “stated” yield (i.e. yield chasers). At these valuations, it doesn’t take much movement to wipe out a 2 to 4 percent yearly dividend — something that could be realized in the next few years by holders of these stocks.

MONETARY FACTORS 

Monetary factors such as the level of nominal and real interest rates and overall Central Bank policy are also inputs of our models. Overall, the monetary factors we follow are neutral. While the Fed has ended its massive Quantitative Easing program and is set to raise interest rates as early as September, it is still accommodative overall. The Fed has made it clear that the path of interest rate increases will be low and slow. They have also not given a timetable for when they will start to unwind their massive balance sheet. The Fed says it will be data dependent, but every time the criteria has been met, they have come up with a new metric and put off increasing rates.

LOOKING FORWARD 

I have likened the current state of the markets to an adjustment period ahead of the Fed’s normalization of rates and the current stage of the economic cycle. Equities could continue to be range bound as markets price in the factors discussed above, in addition to the Greece/European issues. At this point, stocks are boxed in because if economic growth accelerates, it will aggravate cost pressures and interest rates, thereby capping profit growth. Conversely, if economic growth gets weaker and the Fed holds off on rate hikes, sales will be inadequate to drive earnings growth. At this point, easy choices are a thing of the past, so we are avoiding an all-in or all-out approach. We are prepared for more volatility and hope to take advantage of the coming opportunities.

Disclaimer Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Uncle, Uncle!!

Posted February 4, 2015 by paragon. tags:Tags: , , , ,
Oil Well

The dramatic drop in the price of oil over the last few months is captivating the markets. It seems it is coming down to a giant game of chicken to see who will cry first: Shale producers, unstable oil dependent export countries such as Nigeria, Venezuela, Russia, or other unconventional sources such as deep-water and oil sands projects. A massive supply glut that has been building for the last few years has finally come to a head. On Thanksgiving Day, to the dismay of many OPEC members, the Saudis decided against a production cut and in favor of letting the price fall in order to maintain their market share. They have decided to let the market do the work in taking out the competition. The competition to OPEC from the so called unconventional sources (e.g. shale, deep water, oil sands) is responsible for most of the global production growth over the last few years.

There is no way to know where oil prices will bottom. The drop is in a spiral that has tremendous downward pressure in the short-term and trying to call the bottom is nearly impossible. Everyone is producing as fast as they can while they are still alive. This causes inventories to continue to build in the short-term thereby exacerbating the supply situation and causing the price to continue to fall further. Drilled wells are literally “sunk costs” and you might as well keep pumping and getting something for them. However, new wells are discouraged from coming online at these low oil prices. The economic effects are just starting to be felt on the oil producers and it will take at least a few quarters to play out. In the end it is as it has been said, the cure for low prices is low prices. Ultimately it is more of a question of how long rather than how low.

The Saudis can withstand the drop with a few caveats. They may act sooner if the price drop creates systemic effects that threatens themselves in a geopolitical manner. The dramatic drop in oil is now getting so low that it is causing tremendous pain for oil dependent countries like Venezuela, Iran, Nigeria and Russia. The contagion effect from a crisis in these countries is becoming a significant concern. If the concerns for economic stability become too great you could see OPEC act as it is in no one’s best interest to have a significant devastation to the global economy.

Ultimately, oil prices are unsustainable at these levels and lower. How does a one percent excess of inventory levels lead to a fifty percent drop in the price of oil? In the end low oil prices are self-correcting as the effect on high-cost producers reduces supply in the out months and years. The big question long-term is whether $80 oil will be the new $100. The oil market is currently oversupplied by 2 million barrels a day. The irony is it really doesn’t take much disruption to take out that oversupply – which would cause prices to ricochet back up. Nigeria, Libya and Venezuela, produce about 5 million barrels a day and all are fragile situations that are hurting significantly. Much of the U.S. shale production is on the ropes, especially among those who came late or in low quality areas. Cheap capital and high prices made the shale boom viable but now the situation is the opposite. Some shale production will always remain but much of it could fail. The majority of shale wells are depleted within two years requiring constant drilling to keep up production. The constant drilling requires continual capital infusions making it questionable even in good times. On December 11, Bloomberg reported that a Deutsche Bank analyst report predicted that about a third of junk rated energy companies may be unable to meet their obligations at $55 a barrel. When prices recover shale will not recover as quickly now that its weaknesses have been exposed.

As I mentioned in a previous blog post, much of the energy boom in the U.S. has been financed with cheap credit to due to the easy money policies of the Federal Reserve. The process of normalization has caused the dollar to rapidly strengthen because our rates are higher relative to other developed countries. Since commodities like oil are priced in dollars a rising dollar pushes the effective oil price down. Rapid currency movements can create economic stress with major casualties. Normally the Fed could combat this by lowering interest rates but rates are already at zero.

Although the price of oil is down over fifty percent since last summer the current panic indicates that a bottom could be found in the first quarter of 2015, if not within the next few weeks. Whether that means it dips into the $20 or $30 range first is a real possibility. However, there is the very real probability that prices could recover quickly. Shale production growth will come off faster than expected. As mentioned previously, most of the current oversupply is due to shale production which can be brought online much quicker than conventional oil projects and requires constant drilling to maintain production. Now the lower price and higher financing costs will preclude new shale production from coming online thereby reducing the future supply growth. From a technical point of view, the price of oil itself is in a panic sell-off with extremely negative sentiment. As the supply/demand dynamics eventually change it could cause the price to snap back as quickly as it went down. As I mentioned earlier the surplus of oil is only one percent above daily demand. That is literally on a few hours of worth of consumption! Oil fields are always in a natural state of decline and so require new means of production to offset the declines. The demand for oil grows faster at $50 a barrel than $100 and demand was growing when the price was over $100. The net effect of lower oil prices is a stimulus to the economy.

So what is our current approach in regards to energy? We are currently altering our exposure in the energy space to reflect the new reality and opportunities. Along with everyone else, we have been surprised by the dramatic drop in oil. The impact on energy companies’ shares has had a negative short term effect on our performance but is also creating great opportunities as the quality assets get taken down along with the weak ones. The challenge in the short term is whether some version of a crisis develops because of the contagion effects of the economic damage done to energy producers or export dependent countries. We will use any continued drop to gain exposure to quality assets in the space but in a patient manner as a bottom has not yet been put in. We want to take advantage of the sell everything related to energy mindset that is currently unfolding. We favor conventional and well capitalized energy producers and servicers and will be moving our exposure in this direction.

Written by Nathan White, Chief Investment Officer of Paragon Wealth Management

Disclaimer Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

Buy And Hold

Posted October 29, 2014 by admin. tags:Tags: , , ,
Old Stock Certificates

I was recently reminded of how much I disagree with the “Buy and Hold” concept of investing. One of our clients, brought in several stock certificates that she inherited from her family. They were dated from 1902 to 1920. That was a period of time when mining companies were very popular with investors. She asked us to research the current value of the certificates.

Her family held several of these certificates for over 100 years. Based on the number of shares and their valuation levels it appeared that some of these stocks had been valuable at one time. Unfortunately, her family had followed the Buy and Hold investment strategy and still continued to hold them.

After some research, it turns out that one company had been sued into oblivion, one morphed into another company and then that new company collapsed, one just disappeared, one went bankrupt and another had financial fraud issues. Bottom line, all of the stocks had gone from being valuable to becoming worthless….over time. They bought and held just like the “experts” told them to.

While this may seem surprising, it really isn’t. Imagine if your relatives in 1920 had the foresight to buy the original 20 stocks that made up the Dow Industrials average and held them until today. You would be very rich, right? Your relatives had bought the largest, highest profile stocks available 94 years ago. Actually, only six stocks (out of the original 20) from the Dow Industrial Average still exist.

If you read our blog, you know that I am not a fan of the Buy and Hold approach to investing. Actually, I get annoyed when I hear financial advisors and the media espousing its virtues. Some advisors support it with such zeal that it almost seems like it is a religious experience for them. I often wonder how many of those advisors actually have their own money invested in a Buy and Hold strategy.

The truth is that Buy and Hold works best sometimes and Active Management works better other times. Different styles of management come in and out of favor over market cycles. The big problem with Buy and Hold is that everything seems great while the market is going up. However, as soon as the market starts going sideways or down, then the Buy and Hold strategy becomes very difficult to stick with. If you cannot stick with your strategy then it is likely that you will never be able to generate good long term returns. If you aren’t going to generate good long term returns, then what is the point of investing?

In both the 2000 and 2008 bear markets, investors who followed a Buy and Hold strategy and invested in the S&P 500 lost roughly 50% of their value during those bear markets. Many found it too difficult to stick with that strategy and sold out of their investments near the bottom of the decline. Many investors never recovered from their extreme losses.

John “Jack” Bogle of Vanguard is one of Buy and Hold’s biggest proponents. It is hard to take him seriously when you understand that he has personally made a fortune pitching the Buy and Hold strategy for years. He is definitely not an impartial voice in the debate.

According to a November 28, 2013, Wall Street Journal article, Jack Bogle is invested in his son’s fund. It is even more interesting when you realize that his son, John Junior, has been managing a fund since 1999 that follows a very active investment strategy that is the polar opposite of Buy and Hold. His fund uses computer models to analyze earnings surprises, relative stock valuations, corporate accounting issues, etc. His strategy is about as far away from a Buy and Hold strategy as you can get. Even more interesting is that Jack (senior), considered the unofficial spokesman of the Buy and Hold movement, is personally invested in his son’s highly “Actively Managed” fund.

If John Bogle senior does not believe in using “Active Strategies”, then why is he personally invested in a fund that follows a very active strategy? Why is he paying higher fees than his index funds charge to invest some of his own money? Interesting….

My belief and experience is that pro-active strategies, such as the ones we follow at Paragon, require a lot more work to execute but provide the highest probability for long term investment success.

As always, if your risk tolerance or investment objectives have changed, please reach out to me or one of the members of our team, and we can discuss any adjustments we need to make to your current plan. We appreciate the confidence that you put in us.

Written by Dave Young, President & Founder of Paragon Wealth Management
Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

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